What do you do if your business "gets into difficulty"?

Businesses of all sizes get into problems every day. But smaller home-based businesses often lack the expertise to set things right. What are the options? Call in outside help to improve the situtation? Do nothing? Tim Meadows Smith explains how to handle a looming crisis.

What happens, when success begins to falter? In this unfamilar territory what should the directors' next move be?

It is human nature, we are all happy to ask for advice for positive things, but none of us likes to expose our weaknesses. Women are normally happy to see the doctor for a pregnancy but less so for a sexually transmitted disease.

Likewise companies are happy to take advice for a range of positive improvements and innovation or investment but are much more circumspect about advice for refinancing, cash flow problems, or when just trying to survive. Directors of a business in difficulty are likely to become secretive and defensive.

This is when they most need to be open and listening to well qualified advice. They may even convince themselves that they cannot afford to take advice where, in reality, they cannot afford not to.

If financial difficulty is new territory, directors take incorrect action based on unhelpful assumptions. Firstly, they commonly believe that liability is limited within the company; wrong, personal liability is placed on the director unless he or she can prove that all of the rules, many they are unaware of, were followed.

Next, they often assume people do not know the position the company faces and if they did support would be withdrawn; wrong, people always know and the action which causes support to be withdrawn fastest is secrecy, or worse, unfulfilled promises e.g. "the cheque's in the post".

Last, many assume nothing can be done; wrong, in almost all circumstances there are better outcomes available than incumbent directors imagine, they are simply unaware of the options for saving their business and tools for achieving a company turnaround.

Any director of a company in difficulty needs, first, to understand their obligations under the law, and then how to operate within the law. Essentially, action must be taken with the company's creditors in mind who will maintain their own limited liability protection.

It is crucial to clear up exactly who the directors are; in the UK the law recognises you as a director without that being your title, or you being registered at Companies House. If you advise a company and your advice is acted upon then, like it or not, you are a shadow director and therefore a director in the eyes of the law.

Simply resigning does not remove your liability if the company is already insolvent at the time of your resignation. If you resign as a director at any time you should draw up a statement of affairs to be able to show that status of the company at the time of your resignation. Few accountants are familiar with such statements so take care to find the right adviser.

Even if the company is not taking advice, as a director, you should as a precautionary measure to protect yourself from becoming personally liable. Legal advice is often expensive, there is a very good guide produced by a turnaround and business rescue firm I chair that is free to download at www.rescue.co.uk. That guide will provide most of the information a director of a troubled business should know and consider with the investment of about an hour of effort.

Once the obligations are understood, the most important things directors of a troubled company should do are: - Take advice over the solvency tests - Daily meetings and clear notes on decisions made will help the issue - Take action and make sure the staff suppliers and customers are supportive - Do not allow the position to deteriorate - Get qualified help as soon as possible - Follow the law

Beware taking advice from a liquidator, they have a licence to protect and as such are wary about the risks associated with helping turn a company around. An experienced turnaround practitioner will have seen a similar situation to yours before and can advise directors and shareholders on their options for saving the business and how best to preserve value.

In most cases there are better alternatives than liquidation and often ways to protect directors from the consequences of business failure. When selecting a business rescue specialist, and I appreciate there is often little or no time in which to decide, beware those that have a single offer, such as 'HMRC mediation', 'pre-pack' or 'CVA' but rather, appoint a firm that offer a full range of solutions that they will tailor according to your specific circumstances.

About the author: Tim Meadows-Smith is an experienced non-executive chairman, director and business advisor, from a classical sales and marketing background gained with famous global FMCG brand owners. He has worked with businesses globally in the FMCG, logistics, service and technology sectors. He may be reached by email at Tim@Meadows-Smith.com find further articles at http://www.timmeadows-smith.co.uk